This week the Board of Governors of the Federal Reserve System issued a final rule amending portions of Regulation CC, which implements the Expedited Funds Availability Act. The changes primarily affect the check collection and return provisions of the regulation and are intended to reflect that, today, the United States check collection system is no longer paper-based. According to the Federal Reserve Board, the modifications reflect the virtually all-electronic check collection and return environment, and encourage all depositary banks to receive—and paying banks to send—returned checks electronically.
The final rule amends Regulation CC, effective July 1, 2018, in the following ways:
- The expeditious return provisions will be revised to require all returned checks, including electronic checks, to be returned by 2 p.m. on the second business day following check presentment. The old "forward-collection" test will be eliminated.
- A new condition for expeditious-return liability will be added, providing that a depositary bank must have the capability to accept returned checks electronically in order for liability and damages to be imposed on a paying or returning bank for a late return.
- The return requirements will be expanded beyond items that were originally paper checks to include electronically-created items (check-like items created in electronic form that never existed in paper form). The sending and receiving banks may vary the application of the regulation to electronically-created items by agreement.
- New indemnities will be added for losses suffered by a transferee bank, any subsequent collecting bank, the paying bank, and any subsequent returning bank due to unauthorized or duplicate electronically-created items.
- Finally, a new indemnity for remote deposit capture will be added to require the bank that accepted a remote deposit check to indemnify a depositary bank when an original paper check is returned unpaid because the check was previously deposited using a remote deposit capture service.
In connection with the final rule, the Board also announced that it is requesting comments on further proposed amendments to Regulation CC. That new proposal would amend the existing liability provisions to include a presumption that an electronic check was altered, rather than forged, when that question is in dispute. There is currently a split in the courts on this issue. See Wachovia Bank v. Foster Bancshares, (7th Cir. 2006) (presumption of alteration) and Chevy Chase Bank, F.S.B. v. Wachovia Bank, N.A., (4th Cir. 2006) (no such presumption).
We believe the changes summarized above will be beneficial for financial institutions, most of which already process checks electronically, by clarifying and expediting check collection and return procedures. The new indemnities relating to electronic checks will also add a layer of protection that did not previously exist. While the changes relating to electronically-created items should provide protections to paying banks, there are still significant issues relating to the nature of those items and the legal framework that applies to them.